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How Safe Are Government Bonds Really?

Typically a saver doesn’t “pay” to keep his money safe. A saver simply deposits money into the bank and then collects paltry interest.

But what would you do when simply stashing money in the bank is not an option? What if the worry is not theft in the physical form, but overall devaluation of the money itself? You would have to choose another way to hold your wealth.

And that is where the problem lies.

If you have a few million dollars or euros to safeguard, chances are you would diligently pursue a strategy of diversification. You’d put some funds in different banks and denominate your holdings into different currencies. But what if you had hundreds of millions, or even billions of dollars? What could you do to protect yourself?

A simple savings account won’t do, so you might look to bonds. You could buy debt, or more specifically, government debt. But from what government?

Which particular government bonds do you think has the least credit risk? Will it pursue a strategy aimed at devaluing your funds? Does it also have a large enough capital market to accept your incoming billions without disruption, and have financial laws that allow cross-border transactions?

At the end of the day, it’s easy to spot the favorite choices because their interest rates have fallen dramatically…

The U.S., for all of its troubles, remains a top choice for those wanting to stash their excess cash. With an inflation rate of 2.3%, and the current yield on a two-year U.S. Treasury bond hovering around 0.25%, buyers of these government bonds are accepting a 2.05% loss of purchasing.

This is essentially the same as paying the U.S. government to hold your money for several years, simply being happy you can actually retrieve it at the appointed time. Of course, if inflation falls, then your negative rate of return could shrink.

Now the German government has joined the party. It has finally recognized the incredible investor demand for safety-regardless-of-interest and has issued a 2-year bond that pays zero… nada… zip. A buyer of this bond will receive no interest whatsoever. And he’ll see the investment fall in purchasing power by the rate of inflation, which is currently 1.9%.

And then there’s Switzerland…

This country is quite the conundrum. Investors believed the Swiss franc was so close to being backed by gold that they dumped euros and bought Swiss francs by the bucket last summer. This caused the cost of Swiss goods (watches, machinery, etc.) to skyrocket, threatening exports and tourism. As a measure of how expensive the currency had become, if you exchanged dollars and bought Swiss francs to buy a Big Mac, it would have cost you $17.50!

But back to our interest rate conversation.

The Swiss have long recognized that investors buy government bonds for different reasons. As such, the Swiss do not limit their interest rates to merely positive rates, or even zero. The Swiss allow their bonds to be bought at less than zero interest.

Recently the country sold bills at -0.62%, so for every one million Swiss francs you invested, you’d only get back 993,800. Brilliant! This takes the idea of “negative rates of return” to new heights!

Of course, in keeping with the math of the other two examples, we must consider Switzerland’s rate of inflation. Over the past year, prices in Switzerland have actually fallen by 0.99%. It has experienced deflation.

Think about how weird this is. In the country seen as the ultimate in safety, they issue bonds that charge the investor interest (-0.62%). At the same time, there is deflation (-0.99%). The result is a positive rate of return in Switzerland of 0.37%. We live in strange times indeed.

So what are you to do with your money? Where should you put your money to keep it safe?

That depends on many different factors… but your first step should be to know what options you have. And presenting all the options available to you is what 30 of the world’s top currency experts plan to do at the Global Currency Expo this September. I will be presenting at this conference as well.

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Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.